Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70283
Authors: 
Livshits, Igor
MacGee, James
Tertilt, Michèle
Year of Publication: 
2011
Series/Report no.: 
EPRI Working Paper 2011-1
Abstract: 
Financial innovations are a common explanation of the rise in consumer credit and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers' risk of default and a fixed cost to create each contract offered by lenders. Innovations which reduce the fixed cost or ameliorate asymmetric information have large extensive margin effects via the entry of new lending contracts targeted at riskier borrowers. This results in more defaults and borrowing, as well as increased dispersion of interest rates. Using the Survey of Consumer Finance and interest rate data collected by the Board of Governors, we find evidence supporting these predictions, as the dispersion of credit card interest rates nearly tripled, and the share of credit card debt of lower income households nearly doubled.
Subjects: 
Consumer Credit
Endogenous Financial Contracts
Bankruptcy
JEL: 
E21
E49
G18
K35
Document Type: 
Working Paper

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